There are ups and there are downs. We hope for more ups than downs but when it comes to investing, occasionally down is a good thing. It’s hard sometimes to think like this, especially today (originally written in Dec. 2018) when the Dow is down about 1500 points in two days, but that is what separates a reasoned approach to an emotional approach.
As an investor, I’d rather buy low and sell high but it’s unrealistic to think that stock prices will only go up. If that were true then every time I buy, I’d be buying low and we’d all be winners.
I don’t wait for down days to invest but if I’m going to invest anyway, why not on a day when everyone else is thinking about selling? During the falling market of 2008 I continued buying in two ways: dollar cost averaging through regular payroll deductions into my 401k and through purchases in my taxable brokerage account. The latter purchases were more discretionary and I’d buy on days when the market was down (not every purchase was on a down day but more often than not, it was). Not only that, but my buying accelerated as the market fell further.
The reason I was confident in this action was that I had time on my side. This was money that I was investing for the future, for retirement. Being many, many years away, I had time to recover and buying at lower and lower prices meant that recovery would be more pronounced.
Sure enough, in 2009, I recovered all the previous year’s losses and then some.
But what about now? I am retired and I do very little buying any more. The biggest fear that someone who retires has, is a severe downturn in the markets shortly after retiring, which is exactly what’s happening to me. I’m not worried however.
The possibility of losing your hard earned nest egg soon after retirement is called sequence of return risk. It’s a fancy name for losing value early in retirement. And there are steps I’ve taken to minimize if not eliminate this problem. I’ll get to those in a minute but for now let’s deal with the current downturn.
A key point to remember is that just because you retire, you don’t suddenly need all the money at once. I still have time on my side. Sure, I might use some of the money, but most of it will have time to recover. Another key point has to do with the timing of this downturn. The month of this drop, December, is when I receive the bulk of my dividends which I have setup to automatically reinvest. The reinvested dividends are buying at a lower price, increasing my potential return.
This kind of reasoning doesn’t diminish the anxiety we all feel watching the market tank like this but it does offer solace. And a year or two from now when you look back, you’ll be thankful for the discipline you had.
Now onto the my method to avoid sequence of return risk, a downturn in stocks in the early years of retirement. First, my wife is fully on board with our lifestyle but has no intention of leaving work. So we have taken what I call a tiered or staggered approach to retirement, minimizing our reliance on our savings early in the process.
The second thing we did was to begin shifting our investments from nearly 100% stocks to more bonds about 18 months before I retired. We did this without selling any stocks thereby avoiding capital gains. How? We sold a business and a house and invested the proceeds into bonds. We now have about 20% in bonds which have increased in value as stocks have decreased. If we needed the money, we’d sell the bonds to allow the stocks time to recover.
The third thing was also planned about 18 months before I retired. We also shifted to a larger cash position. Some of the proceeds from the sale of the business and the house went to cash. This allows us to spend without touching the stocks or bonds allowing them to recover and grow into the future.
If your plan is sound and flexible to weather most situations, a correction, or worse, a recession, won’t scare you and could even be a good thing.